TFSA withdrawals are tax-free and can be made at any time in any amount. The withdrawn amount is added back to contribution room on January 1 of the year following the withdrawal, not in the same year. Re-contributing in the same calendar year as the withdrawal can trigger a 1% per month over-contribution tax if available room has already been used.
The basic rule
Three things happen when funds are withdrawn from a TFSA: there is no tax on the withdrawal, the withdrawn amount is added back to contribution room on January 1 of the year after the withdrawal, and any room used by the withdrawn contributions is not refreshed in the same year. The third point is what trips most people up.
Same-year re-contribution risk
If a taxpayer has used all their available TFSA room and then withdraws and re-contributes in the same calendar year, the re-contribution counts as new contribution above the available room. This triggers the 1% per month over-contribution tax on the excess for every month it remains in the account.
Example: A taxpayer with $5,000 of available room contributes $5,000 in March, withdraws $2,000 in May, then re-contributes $2,000 in August. The August contribution exceeds available room ($0 in 2026 from this TFSA, with the $2,000 only re-added January 1, 2027). The $2,000 over-contribution generates $20 per month in tax until withdrawn or until the new year’s room is added.
When same-year re-contribution is safe
Same-year re-contribution is fine if the taxpayer still has unused room from prior years or from the current year’s new dollar limit. A taxpayer with $30,000 of carry-forward room who contributes $7,000, withdraws $5,000, and re-contributes $5,000 in the same year has $23,000 of cumulative room remaining and is well within limits.
The risk is specifically when total contributions for the year (including re-contributions) exceed the year’s opening contribution room.
Withdrawal amount versus contribution amount
| Action | Amount affected |
|---|---|
| Contribution | Reduces contribution room by the cash amount contributed |
| Investment growth inside TFSA | Does not affect contribution room |
| Investment loss inside TFSA | Does not affect contribution room (the loss is real but room stays the same) |
| Withdrawal | Increases contribution room on January 1 of the following year by the withdrawn amount, including any growth |
This means that growth inside the TFSA effectively expands future contribution room. A $7,000 contribution that grows to $10,000 and is then withdrawn restores $10,000 of contribution room the next January 1, even though only $7,000 was originally contributed.
Direct transfers do not trigger re-contribution rules
Moving funds from one TFSA to another at a different financial institution can be done as a direct transfer through Form RC413 or the institutions’ transfer process. A direct transfer does not count as a withdrawal or a contribution. It does not affect contribution room and does not have to wait until the next year.
Withdrawing in cash and depositing into a different TFSA, in contrast, is treated as two separate transactions: a withdrawal that doesn’t restore room until next January, and a new contribution that uses current room. Always use direct transfer when changing institutions to preserve flexibility.
Tracking room independently
CRA’s published TFSA room often lags actual contributions by months because financial institutions report contributions annually. The taxpayer is responsible for tracking contributions and withdrawals correctly. A simple spreadsheet listing date, transaction type, and amount avoids most over-contribution mistakes.
Fixing an over-contribution
The fastest fix is to withdraw the excess as soon as it is identified. The 1% per month tax stops accruing the month after the excess is removed. A formal request for cancellation of the tax can be made on Form RC243 if the over-contribution was due to reasonable error and was withdrawn promptly. CRA accepts these requests in some cases but not all.
Frequently asked questions
- When does TFSA withdrawal room come back?
- January 1 of the year following the withdrawal. A 2026 withdrawal does not restore room until January 1, 2027.
- Can I re-contribute the same year I withdraw?
- Only if you still have unused contribution room. Withdrawing and re-contributing the same year does not refresh used room until the next January 1.
- Does TFSA growth restore future contribution room?
- Yes. The full withdrawn amount, including investment growth, is added to next year's contribution room.
- What is the over-contribution penalty?
- 1% per month tax on the excess amount, applied for every month it remains in the account.
- Are TFSA withdrawals taxable?
- No. All TFSA withdrawals are tax-free and do not appear on your tax return.
- How do I move a TFSA to a different bank without losing room?
- Use a direct transfer (Form RC413 or institution-initiated transfer). Withdrawing cash and re-depositing counts as a withdrawal plus new contribution and may trigger over-contribution.
- How do I fix an over-contribution?
- Withdraw the excess immediately to stop the 1% monthly tax. Form RC243 can request cancellation of the tax if the over-contribution was a reasonable error.